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The first liquidity stress to which BIPRU 12.5.6R refers is an unforeseen, name-specific, liquidity stress in which:(1) financial market participants and retail depositors consider that in the short-term the firm will be or is likely to be unable to meet its liabilities as they fall due;(2) the firm's counterparties reduce the amount of intra-day credit which they are willing to extend to it;(3) the firm ceases to have access to foreign currency spot and swap markets; and(4) over

For the purpose of BIPRU 12.5.11R, a firm must assume that the second liquidity stress is characterised by:(1) uncertainty as to the accuracy of the valuation attributed to that firm's assets and those of its counterparties;(2) inability to realise, or ability to realise only at excessive cost, particular classes of assets, including those which represent claims on other participants in the financial markets or which were originated by them;(3) uncertainty as to the ability of

In carrying out the liquidity stresses required by BIPRU 12.5.6R, a firm must:(1) analyse each of the sources of risk identified in BIPRU 12.5.14R;(2) record the evidence which supports any behavioural assumptions that it makes in carrying out those stress tests;(3) record the evidence which supports its assessment of the adequacy of its liquid assets buffer; and(4) identify those of the measures set out in its contingency funding plan that it would implement.

For the purpose of assessing its retail funding risk, a firm must:(1) estimate the gross retail outflows that could occur under the liquidity stresses required by BIPRU 12.5.6R;(2) identify the stress, or combination of stresses, to which it considers its retail funding to be most vulnerable and estimate the gross retail outflows that could occur under that stress or combination of stresses; and(3) divide its retail funding into funding which the firm assesses as having a higher

In general, the appropriate regulator expects a firm's retail funding to be less responsive than its wholesale funding to actual or perceived changes in the firm's credit-worthiness. However, a firm should nevertheless make its own assessment of the relative responsiveness of its wholesale and retail funding.

For the purpose of assessing its intra-day liquidity risk arising from its direct participation in a payment or settlement system, a firm must in relation to each such system in which it participates:(1) calculate on an intra-day basis the net amounts of collateral and cash required by that firm to fund participation in that system; and(2) estimate how the amounts in (1) could change under the liquidity stresses required by BIPRU 12.5.6 R.

For the purpose of calculating the net amounts of collateral and cash under BIPRU 12.5.26R, a firm should separately analyse:(1) the amounts of collateral and cash needed in relation to both its own payments and those of its customers; and(2) the intra-day timing of the payment of cash and the posting of the collateral, including the time at which the demand for its collateral and cash is greatest.

For the purpose of BIPRU 12.5.26R, a firm should ensure that it takes into account, in both normal financial conditions and in periods of stress, the effect of: (1) other participants in a payment system withholding some or all of the payments expected from them; and(2) its customers increasing either or both the volume and value of their payments.

At the same time as it carries out the calculation and estimation in BIPRU 12.5.26 R, a firm which participates directly in one or more payment or settlement systems must also estimate the impact on its liquidity position of the customer to which it has the largest intra-day credit exposure defaulting on its payment obligations to the firm:(1) under normal financial conditions; and(2) under the stresses required by BIPRU 12.5.6 R.

For the purpose of BIPRU 12.5.31R, the appropriate regulator would expect a firm, in relation to each payment or settlement system in which it participates directly, to provide details of:(1) that firm's charges for providing intra-day credit;(2) any collateral requirements which it applies to its customers;(3) the credit limits that it imposes (and the circumstances, if any, in which credit may be provided notwithstanding a limit breach);(4) the extent to which the customers

BIPRU 12.5.34R applies to a firm which:(1) is not a direct participant in a given payment or settlement system;(2) is a customer of a firm that is a direct participant in such a system for the purposes of gaining access to that system; and(3) receives intra-day credit from that participant firm or prefunds its account with such a firm.

For the purpose of assessing its intra-day liquidity risk a firm to which BIPRU 12.5.33R applies must assess the effect on its own position of a participant firm from which it receives intra-day credit or with which it has a prefunded account being unable to perform its obligations to that firm:(1) under normal financial conditions; and(2) under the stresses required by BIPRU 12.5.6 R.

Where a firm has an intra-group liquidity modification permitting it to rely on liquidity from other members of its group in order to satisfy the overall liquidity adequacy rule, or may be exposed to calls on its own liquidity resources from others in its group, then in assessing its intra-groupliquidity risk it must:(1) take into account:(a) the extent to which it and other entities in its group have access to central bank funding;(b) in relation to any group entity on which

In relation to an incoming EEA firm or third country BIPRU firm which does not have a whole-firm liquidity modification, that firm must assess the risk that its UKbranch may be exposed to calls on liquidity under its control from its head office:(1) in normal financial conditions; and(2) under the liquidity stresses required by BIPRU 12.5.6 R.

In complying with BIPRU 12.5.38R a firm is therefore assessing its exposure to inter-office liquidity risk, rather than intra-groupliquidity risk. It is the appropriate regulator's assessment of the firm's inter-office liquidity risk that is one of the factors that will inform the appropriate regulator's decision as to the appropriate size for the firm's local operational liquidity reserve (as described in BIPRU 12.2).

For the purpose of assessing its cross-currency liquidity risk, a firm must:(1) in relation to each currency in which it has significant positions, calculate its gross outflows and gross inflows having regard to their respective maturities;(2) where it identifies a net outflow in (1), assess how it will fund that outflow; and(3) estimate how the amounts in (1) and the assessment in (2) could change under the liquidity stresses required by BIPRU 12.5.6R.

For the purpose of assessing its off-balance sheet liquidity risk, a firm must:(1) identify all off-balance sheet activities that might affect its cash flows;(2) calculate the effect on its cash flows of those activities in normal financial conditions; and(3) estimate the effect on its cash flows of those activities under the liquidity stresses required by BIPRU 12.5.6R.

For the purpose of BIPRU 12.5.42R, a firm must take into account the circumstances in which it may choose to provide liquidity support in respect of its off-balance sheet activities beyond its contractual obligations (if any) to do so.

For the purpose of BIPRU 12.5.42R, a firm must in particular consider the impact on its cash flows of:(1) derivatives positions;(2) contingent liabilities;(3) commitments given; and(4) liquidity facilities to support securitisation programmes.

In relation to derivatives positions, a firm should:(1) assess the effect on its cash flows arising from the maturity, exercise and repricing of derivatives in which it holds a position, including the impact of counterparties:(a) who may require the posting of additional margin or collateral in the event of a decline in that firm's credit rating;(b) who may require the posting of additional margin or collateral (or the return to them of margin or collateral) in the event of a

In relation to its contingent liabilities, a firm should:(1) calculate the impact on its cash flows of those of its contingent obligations that will be triggered in normal financial conditions; and(2) estimate the impact on its cash flows of those of its contingent obligations that may be triggered under the liquidity stresses required by BIPRU 12.5.6 R.

In relation to its commitments (other than liquidity facilities to support securitisation programmes)), a firm should:(1) calculate its maximum contractual exposure arising from those commitments;(2) calculate the effect on its cash flows of the drawing of those commitments in normal financial conditions; and(3) estimate the effect on its cash flows of the drawing of those commitments under the liquidity stresses required by BIPRU 12.5.6 R.

For the purpose of BIPRU 12.5.48G, a firm should:(1) consider its contractual exposure to the following types of commitment: committed funding facilities, undrawn loans and advances to wholesale counterparties, mortgages that have been agreed but not yet been drawn down, credit cards, overdrafts (and other retail lending facilities);(2) ensure that its analysis of each type of commitment is sufficiently granular to enable that firm to:(a) assess the circumstances in which counterparties

In relation to liquidity facilities to support securitisation programmes, a firm should:(1) assess the extent of its contractual obligations to provide liquidity support to sponsored and third-party structured vehicles;(2) identify the circumstances in which support will, or is likely to, be called; and(3) assess the impact on that firm's cash flows of such support being called:(a) in normal financial conditions; and(b) under the liquidity stresses required by BIPRU 12.5.6R.

For the purposes of assessing its franchise-viability risk, a firm must assess, under the liquidity stresses required by BIPRU 12.5.6 R, the liquidity resources required to maintain its core business franchise and reputation.

For the purpose of assessing its exposure to marketable assets risk, a firm must assess how the marketable assets comprised in its liquidity resources will behave:(1) under normal financial conditions; and(2) under the liquidity stresses identified in BIPRU 12.5.6R, including an assessment of the effect of these stresses on:(a) its ability to derive funding from its marketable assets in a timely fashion;(b) the potential for using those assets as collateral to raise secured funding

In complying with BIPRU 12.5.56R, a firm should consider all marketable assets which count towards its liquidity resources for the purposes of meeting the overall liquidity adequacy rule. A firm should therefore include in this assessment any assets that it holds in its liquid assets buffer.

The appropriate regulator regards as marketable those of a firm's assets that it is able to sell outright or repo. For liquidity management purposes, a firm would ordinarily expect to hold a stock of assets of this kind in order to reduce the likelihood that it may need to borrow unsecured at short notice. To the extent that these assets may behave differently under stress conditions than under normal financial conditions, a firm is subject to marketable assets risk.

In considering its operational capability to generate funding from assets, a firm should be aware that its capability in this regard is likely to depend on:(1) whether it has in place arrangements for repo;(2) the extent to which that firm already holds a significant proportion of the market for the marketable asset in question;(3) the extent to which that firm periodically realises some or all of its holdings of that asset; and(4) that firm's accounting treatment and valuation

For the purpose of its ILAA submission to the appropriate regulator, a firm must provide the appropriate regulator with an analysis of the profile of its marketable assets as at the date of submission in a way that:(1) separately identifies its marketable assets according to asset class, maturity, currency, their eligibility for use in central bank monetary operations and liquidity facilities and any other characteristic that it uses in its liquidity management; and(2) assesses

For the purpose of assessing its exposure to non-marketable assets risk, a firm must assess how the non-marketable assets in its liquidity resources will behave:(1) under normal financial conditions; and(2) under the liquidity stresses required by BIPRU 12.5.6 R, including an assessment of the effect of these stresses on:(a) the firm's ability to derive funding from its non-marketable assets; and(b) the impact on the firm's liquidity position of any consequences for its funding

BIPRU 12.2.5 G notes that a firm should include in its liquidity resources sufficient assets which are marketable or otherwise realisable. The appropriate regulator considers those assets which are capable of realisation, but other than through repo or outright sale, as non-marketable assets. To the extent that these assets may behave differently under stress conditions than under normal financial conditions, a firm is subject to non-marketable assets risk. Different forms of

In addition to realising a firm's marketable assets, a firm can meet its outflows in part by expected inflows from maturing non-marketable assets such as retail loans. Inflows from these assets (principal and interest) may in stressed conditions be affected by counterparty behaviour, exposing that firm to non-marketable assets risk.

For the purpose of assessing its exposure to non-marketable assets risk a firm must assess the extent to which the behaviour of inflows from retail loans under the liquidity stresses required by BIPRU 12.5.6R may differ from that suggested by their contractual terms.

For the purpose of the assessment in BIPRU 12.5.67R, a firm should ensure that it assesses repayment behaviour at a level of granularity sufficient to enable it to draw informed conclusions about its liquidity exposure. The appropriate regulator would expect a firm's assessment to analyse separately the non-marketable assets risk associated with each of its relevant products and with each type of counterparty from whom it is expecting repayments.

For the purpose of the assessment in BIPRU 12.5.67R, a firm should in particular have regard to the risk associated with:(1) repayment defaults; and(2) exercise by its counterparties of contractual rights to repay before the expected maturity date or to delay repayment beyond that date.

A firm may also use its unsecured wholesale assets to generate liquidity, otherwise than by outright sale or repo. A firm may, for example, choose to generate funding from some of the assets included in its liquidity resources by using them in securitisation or covered bond programmes. Assets that are typically used to raise liquidity in this manner include residential mortgage loans; commercial mortgage and other loans; credit card and automobile receivables, which have been

A firm which chooses to warehouse assets in the way described in BIPRU 12.5.72R should consider the particular risks that arise from the method of financing that it uses to pre-fund those assets. For example, financing of warehoused assets by means of short-term (rather than long-term) funding is more likely to put that firm under liquidity pressure in the event that its proposed securitisation is not completed (either at all, or at the expected date).

A firm should be aware that the degree of diversification in its liquidity resources can be compromised, particularly in periods of stress, by a number of factors, including:(1) reduced or terminated funding provision from some counterparties as a result of that firm's credit-rating being downgraded or its financial condition deteriorating;(2) disputes over the terms of legally binding commitments to lend which delay the provision of funding;(3) markets previously used by the

The approach taken in BIPRU 12.3 is to set out:(1) overarching systems and controls provisions in relation to a firm's management of its liquidity risk;(2) provisions outlining the responsibilities of that firm'sgoverning body and senior managers for the oversight of liquidity risk;(3) more detailed provisions covering a number of specific areas, including:(a) pricing liquidity risk;(b) intra-day management of liquidity;(c) management of collateral;(d) management of liquidity

A firm must have in place robust strategies, policies, processes and systems that enable it to identify, measure, manage and monitor liquidity risk over an appropriate set of time horizons, including intra-day, so as to ensure that it maintains adequate levels of liquidity buffers. These strategies, policies, processes and systems must be tailored to business lines, currencies, branches4 and legal4 entities and must include adequate allocation mechanisms of liquidity costs, benefits

2The strategies, policies, processes and systems referred to in BIPRU 12.3.4 R should include those which enable it to assess and maintain on an ongoing basis the amounts, types and distribution of liquidity resources that it considers adequate to cover:(1) the nature and level of the liquidity risk to which it is or might be exposed;(2) the risk that the firm cannot meet its liabilities as they fall due; and(3) in the case of an ILAS BIPRU firm, the risk that its liquidity resources

The strategies, policies, processes and systems referred to in BIPRU 12.3.4 R must be proportionate to the complexity, risk profile and scope of operation of the firm, and the liquidity risk tolerance set by the firm'sgoverning body in accordance with BIPRU 12.3.8 R, and must reflect the firm's importance in each EEA State, in which it carries on business2.[Note: article 86(2) (part) of the CRD]42

(1) 2[deleted]2(2) 2[deleted]2(3) A firm should ensure that its strategies, policies, processes and systems in relation to liquidity risk enable it to identify, measure, manage and monitor its liquidity risk positions for:(a) all sources of contingent liquidity demand (including those arising from off-balance sheet activities);(b) all currencies in which that firm is active; and(c) correspondent, custody and settlement activities.(4) 2[deleted]2(5) A firm should ensure that it

As well as the rules in BIPRU 12.3 requiring a firm to have robust systems to enable it to identify, measure, manage and monitor liquidity risk, an ILAS BIPRU firm is also subject to obligations in SUP 16 (Reporting requirements) requiring it to report quantitative data about its liquidity position to the appropriate regulator. That chapter of SUP sets out the applicable data items and the rules governing the frequency of their submission to the appropriate regulator. Absent a

4A firm must, taking into account the nature, scale and complexity of its activities, have liquidity risk profiles that are consistent with and not in excess of those required for a well-functioning and robust system.[Note: article 86(3) of the CRD]

A firm must ensure that:(1) its governing body establishes that firm'sliquidity risk tolerance and that this is appropriately documented;2(2) its liquidity risk tolerance is appropriate for its business strategy and reflects its financial condition and funding capacity; and2(3) its liquidity risk tolerance is communicated to all relevant business lines.2[Note: article 86(2) of the CRD]425

As part of the SLRP, the appropriate regulator will assess the appropriateness of the liquidity risk tolerance adopted by an ILAS BIPRU firm to ensure that this risk tolerance is consistent with maintenance by the firm of adequate liquidity resources for the purpose of the overall liquidity adequacy rule. The appropriate regulator will expect a firm to provide it with an adequately reasoned explanation for the level of liquidity risk which that firm'sgoverning body has decided

A firm must ensure that its governing body reviews regularly (and not less frequently than annually):(1) the continued adequacy of any strategies, policies, processes and systems approved in accordance with BIPRU 12.3.10R; and(2) the firm'sliquidity risk tolerance.

A firm must ensure that its senior managers:(1) continuously review that firm's liquidity position, including its compliance with the overall liquidity adequacy rule; and(2) report to its governing body on a regular basis adequate information as to that firm's liquidity position and its compliance with the overall liquidity adequacy rule and with BIPRU 12.3.4R.

Although a firm'ssenior managers are likely to develop strategies, policies and practices for the management of that firm'sliquidity risk, it is the responsibility of a firm'sgoverning body to approve those strategies, policies and practices as adequate. In determining the adequacy of those strategies, policies and practices, a firm'sgoverning body should have regard to that firm'sliquidity risk tolerance established in accordance with BIPRU 12.3.8R.

The incorporation of liquidity pricing into a firm's processes assists in aligning the risk-taking incentives of individual business lines within that firm with the liquidity risk to which the firm as a whole is exposed as a result of their activities. It is important that all significant business activities are addressed, including activities which involve the creation of contingent exposures which may not have an immediate balance sheet impact.

For the purposes of BIPRU 12.3.17R, a firm must ensure that:(1) it is able to meet its payment and settlement obligations on a timely basis under both normal financial conditions and under the stresses required by BIPRU 12.4.1R; and(2) its arrangements for the management of intra-day liquidity enable it to identify and prioritise the most time-critical payment and settlement obligations.

The appropriate regulator considers that a firm's ability to meet its payment and settlement obligations on an intra-day basis is important not just for that firm, but also for the liquidity position of that firm's counterparties and for the smooth functioning of payment and settlement systems as a whole.

(1) A firm should ensure that its intra-day liquidity management arrangements enable it, in relation to the markets in which it is active and the currencies in which it has significant positions, to:(a) measure expected daily gross liquidity inflows and outflows, anticipate the intra-day timing of these flows where possible, and forecast the range of potential net funding shortfalls that might arise at different points during the day;(b) monitor its intra-day liquidity positions

2A firm must also have regard to existing legal, regulatory and operational limitations to potential transfers of liquidity and unencumbered assets amongst entities, both within and outside the EEA.[Note: article 86(6) of the CRD]4

(1) A firm should ensure that its arrangements for the management of liquidity risk:(a) enable it to monitor shifts between intra-day and overnight or term collateral usage;(b) enable it to appropriately adjust its calculation of available collateral to account for assets that are part of a tied hedge;(c) include adequate consideration of the potential for uncertainty around, or disruption to, intra-day asset flows; and(d) take into account the potential for additional collateral

In complying with BIPRU 12.3.4 R, a firm must ensure that:(1) it actively manages its liquidity risk exposures and related funding needs; and(2) it takes into account:(a) the impact on its own liquidity position of its forming part of a group;(b) the need to manage the liquidity position of individual business lines in addition to that of the firm as a whole; and(c) the liquidity risk arising from its taking positions in foreign currencies; and(3) where it forms part of a group,

In its liquidity risk management plans, a firm should identify clearly its assumptions regarding the transferability of funds and collateral. A firm should expect that the appropriate regulator will scrutinise those assumptions.

Funding diversification should not be considered an end in its own right. Rather, the purpose of diversification is to ensure that a firm has in place alternative sources of funding that strengthen its capacity to withstand a variety of severe yet plausible institution-specific and market-wide liquidity shocks.

(1) A firm should ensure that funding diversification is taken into account in that firm's business planning process.(2) A firm should ensure that its funding arrangements take into account correlations between market conditions and the ability to access funds from different sources.(3) A firm should ensure that in establishing adequate diversification it sets limits on its funding according to the following variables:(a) maturity;(b) nature of depositor or counterparty;(c) levels

In assessing the adequacy of an ILAS BIPRU firm's liquidity resources, the appropriate regulator draws on more than just a review of the submitted ILAA, or in the case of a simplified ILAS BIPRU firm, the submitted ILSA. Use is made of wider supervisory knowledge of a firm and of wider market developments and practices. When forming a view of the individual liquidity guidance to be given to an ILAS BIPRU firm, the appropriate regulator will also consider the regulator’s firm risk

As part of the SLRP, the appropriate regulator will give a standard ILAS BIPRU firmindividual liquidity guidance advising it of the amount and quality of liquidity resources which the appropriate regulator considers are appropriate, having regard to the liquidity risk profile of that firm. In giving individual liquidity guidance, the appropriate regulator will also advise the firm of what it considers to be a prudent funding profile for the firm. In giving the firmindividual liquidity

The appropriate regulator will ordinarily not expect to give individual liquidity guidance to a simplified ILAS BIPRU firm. However, if after review of such a firm'sILSA, the appropriate regulator is not satisfied that the simplified buffer requirement delivers an adequate amount and quality of liquidity resources for that firm, having regard to its liquidity risk profile, the appropriate regulator will issue the firm with individual liquidity guidance and may also consider revoking

Following an internal validation process, the appropriate regulator will write to the standard ILAS BIPRU firm whose ILAA it has reviewed, providing both quantitative and qualitative feedback on the results of the appropriate regulator's assessment. This letter will notify that firm of the individual liquidity guidance that the appropriate regulator considers appropriate together with its reasons for concluding that such guidance is appropriate. The appropriate regulator will

Where the amount and quality of liquidity resources which the appropriate regulator considers a firm needs having regard to its liquidity risk profile are not the same as the firm's own assessment of those resources under its ILAA, the appropriate regulator expects to discuss any such difference with the firm.

Consistent with Principle 11 (Relations with regulators), the appropriate regulator will expect a firm to notify it if the firm does not propose to follow its individual liquidity guidance. The appropriate regulator will expect any such notification to be accompanied by a clear account of the firm's reasons for considering the individual liquidity guidance to be inappropriate. The appropriate regulator will expect to receive any such notification within one month from the date

In relation to an incoming EEA firm or third country BIPRU firm, where the appropriate regulator gives that firmindividual liquidity guidance in relation to its UKbranch, it will have regard to the liquidity risk profile of the branch. In the absence of a whole-firm liquidity modification, the effect of BIPRU 12.2.1R (2)(b) and BIPRU 12.2.3 R is to require the firm to hold a liquid assets buffer of the amount identified as appropriate in its individual liquidity guidance (or in

BIPRU 12.2.9 G records the appropriate regulator's recognition that in periods of stress a firm's liquid assets buffer may be eroded. It may also be the case that in such periods a firm's funding profile deteriorates such that it no longer conforms to the prudent liquidity profile described in the individual liquidity guidance given to the firm. Deviation by a firm from the terms of the individual liquidity guidance given to it by the appropriate regulator or, as the case may

1The appropriate regulator expects that a firm will respond dynamically to any deterioration in its liquidity position and will take contingent action as set out in its contingency funding plan well in advance of a potential event.

Consistent with Principle 11 of the appropriate regulator'sPrinciplesfor Businesses (Relations with regulators), if a firm has not accepted individual liquidity guidance given by the appropriate regulator it should, nevertheless, notify the appropriate regulator as soon as it becomes aware of either of the events identified in BIPRU 12.9.14R (2)(a) or (b).

For the purposes of BIPRU 12.9.17 R, a firm's liquidity remediation plan must:(1) be communicated in writing;(2) detail the firm's forward estimates of the evolution of the size of the firm's liquid assets buffer and of its funding profile;(3) in relation to any of the events identified in BIPRU 12.9.14 R that has occurred, or is expected to occur,1 detail the actions that the firm intends to take to remedy the event,1 or avoid the expected event, as the case may be,1 including

The appropriate regulator will assess the adequacy of the liquidity remediation plan submitted by a firm, including the likelihood of its success. A firm should expect that the appropriate regulator will want to discuss the terms of the liquidity remediation plan submitted to it under BIPRU 12.9.18 R. In its re-examination of the firm's compliance, and likely future compliance, with threshold conditions taken as a whole, the appropriate regulator will have regard to the adequacy

If agreement through discussion with the appropriate regulator cannot be reached as to the necessary actions and timescales to remedy deviation from that guidance, the appropriate regulator will consider using its powers under the Act (for example, its power under section 55J to vary, on its own initiative, a firm'sPart 4A permission or its power of intervention under section 196) so as to require the firm to take such actions as the appropriate regulator considers are necessary

A firm that deviates from current individual liquidity guidance that it has accepted or, as the case may be, from its simplified buffer requirement, will be experiencing a firm-specific liquidity stress for the purpose of the reporting rules in SUP 16 (Reporting requirements). Those rules require the firm to report specified data items more frequently than would otherwise be the case. Additionally, a firm that is implementing a liquidity remediation plan should expect that the

Every firm subject to BIPRU 12 is subject to the overall liquidity adequacy rule. The effect of that rule is that every firm is required to be self-sufficient in terms of liquidity adequacy and to be able to satisfy that rule relying on its own liquidity resources. Where the firm is an incoming EEA firm or third country BIPRU firm compliance with the overall liquidity adequacy rule with respect to the UKbranch must be achieved relying solely on liquidity resources that satisfy

However, the appropriate regulator recognises that there may be circumstances in which it would be appropriate for a firm to rely on liquidity resources which can be made available to it by other members of its group, or for a firm to rely on liquidity resources elsewhere in the firm for the purposes of ensuring that its UKbranch has adequate liquidity resources in respect of the activities carried on from the branch. Where the appropriate regulator is satisfied that the statutory

In considering whether the statutory tests in section 138A of the Act have been met, the appropriate regulator will, amongst others, have regard to the factors detailed below in relation to an intra-group liquidity modification (of the kind permitting the inclusion in a firm's liquidity resources of parent undertaking liquidity support) and a whole-firm liquidity modification. In practice it is likely that the appropriate regulator will view these as preconditions to the grant

The appropriate regulator anticipates that an application to modify the overall liquidity adequacy rule may be accompanied by an application to waive or modify other rules in BIPRU 12 (for example, the stress testing and contingency funding planrules in BIPRU 12.4). The appropriate regulator offers some guidance in this section on applications of this type.

The appropriate regulator recognises that a firm may be part of a wider group which manages its liquidity on a group-wide basis. A firm which considers that the statutory tests in section 138A of the Act are met may apply for an intra-group liquidity modification permitting it to rely on liquidity support from elsewhere in its group. Until a firm has such a modification it will need to meet the overall liquidity adequacy rule from its own liquidity resources. The effect of an

In relation to the regime of liquidity regulation imposed by the authority that regulates for liquidity purposes an applicant firm'sparent undertaking which is constituted under the law of a country or territory outside the United Kingdom, the appropriate regulator will ordinarily expect to be satisfied that:(1) the regime of liquidity regulation to which that undertaking is subject delivers outcomes as regards the regulation of that undertaking'sliquidity risk that are broadly

In relation to an applicant firm wishing to rely on liquidity support from a parent undertaking constituted under the law of a country or territory outside the United Kingdom, the appropriate regulator will ordinarily expect to reach agreement with the authority that regulates that undertaking for liquidity purposes in a number of areas, including agreement that:(1) it will notify the appropriate regulator of any material or persistent breaches by that undertaking of that authority's

In addition, the appropriate regulator will also wish to understand in relation to any group entity on which an applicant firm proposes to rely for liquidity support the legal structure of the group and the extent to which that structure, or any relevant legal principles, may restrict the provision of timely liquidity support in appropriate amounts to the applicant firm when required.

In relation to an incoming EEA firm or third country BIPRU firm, the overall liquidity adequacy rule provides that, for the purpose of complying with that rule, a firm may not, in relation to its UKbranch, include liquidity resources other than those which satisfy the conditions in BIPRU 12.2.3 R. Those conditions seek to ensure that a firm of this kind has a reserve of liquidity for operational purposes that is under the control of, and available for use by, that firm'sUKbranch.

Although an incoming EEA firm or third country BIPRU firm may apply to modify the overall liquidity adequacy rule and other rules in BIPRU 12, in relation to its UKbranch, the appropriate regulator anticipates that many such firms will wish to apply for a modification in the form which the appropriate regulator defines as a whole-firm liquidity modification. In the appropriate regulator's view, a modification to the overall liquidity adequacy rule for a firm of this kind will

Accordingly, a whole-firm liquidity modification envisages:(1) a modification to the overall liquidity adequacy rule so as to permit reliance by the firm, in relation to its UKbranch, on liquidity resources wherever held in the firm for the purposes of meeting that rule; and(2) a waiver of the remainder of the substantive rules in BIPRU 12, with the effect that the UKbranch of the applicant firm becomes subject for the purpose of day-to-day liquidity supervision to the liquidity

In relation to the Home State regulator's or third country competent authority's regime of liquidity regulation, the appropriate regulator will, before granting a whole-firm liquidity modification, ordinarily expect to be satisfied that:(1) the regime in question delivers outcomes as regards the regulation of the applicant firm'sliquidity risk that are broadly equivalent to those intended by this chapter; and(2) there is clarity as to any legal constraints imposed by the Home

In relation to the applicant firm in question, the appropriate regulator will, before granting a whole-firm liquidity modification, ordinarily expect to have reached agreement with the Home State regulator or third country competent authority in a number of areas, including agreement that:(1) it will notify the appropriate regulator promptly of any material or persistent breaches by that firm of its liquidity rules, or of risks that such breaches are imminent;(2) it is satisfied

In relation to the applicant firm in question, the appropriate regulator will, before granting a whole-firm liquidity modification, ordinarily expect to have reached agreement with that firm in a number of areas, including agreement that:(1) it will make available liquidity resources at all times to its UKbranch if needed;(2) it will make available to the appropriate regulator information in an appropriate format on firm-wide liquidity;(3) it will notify the appropriate regulator

The appropriate regulator also anticipates that a whole-firm liquidity modification would be made subject to a number of ongoing conditions and requirements. These are likely to include:(1) the appropriate regulator receiving annual confirmation from the Home State regulator or third country competent authority that it remains satisfied with the arrangements in respect of that firm for liquidity supervision and their operation;(2) an annual meeting with the Home State regulator

2A firm must consider different liquidity risk mitigation tools, including a system of limits and liquidity buffers in order to be able to withstand a range of different stress events and an adequately diversified funding structure and access to funding sources. Those arrangements must be reviewed regularly.[Note: article 86(7) of the CRD]4

2A firm must consider alternative scenarios on liquidity positions and on risk mitigants and must review the assumptions underlying decisions concerning the funding position at least annually4. For these purposes, alternative scenarios must address, in particular, off-balance sheet items and other contingent liabilities, including those of securitisation special purpose entities(SSPEs) or other special purpose entities, as referred to in the EUCRR,4 in relation to which the firm

In order to ensure compliance with the overall liquidity adequacy rule and with BIPRU 12.3.4R and BIPRU 12.4.-1 R, a firm must:(1) conduct on a regular basis appropriate stress tests so as to:(a) identify sources of potential liquidity strain;(b) ensure that current liquidity exposures continue to conform to the liquidity risk tolerance established by that firm'sgoverning body; and(c) identify the effects on that firm's assumptions about pricing; and(2) analyse the separate and

Consistent with BIPRU 12.3.5R, the expects that the extent and frequency of such testing, as well as the degree of regularity of governing body review under BIPRU 12.4.2R, should be proportionate to the nature scale and complexity of a firm's activities, as well as to the size of its liquidity risk exposures. Consistent with the appropriate regulator's statutory objectives under the Act, in assessing the adequacy of a firm's stress testing arrangements (including their frequency

In conducting its stress testing, a firm should also, where relevant, consider the impact of its chosen stresses on the appropriateness of its assumptions relating to:(1) correlations between funding markets;(2) the effectiveness of diversification across its chosen sources of funding;(3) additional margin calls and collateral requirements;(4) contingent claims, including potential draws on committed lines extended to third parties or to other entities in that firm'sgroup;(5)

(1) A firm should ensure that the results of its stress tests are:(a) reviewed by its senior managers;(b) reported to that firm'sgoverning body, specifically highlighting any vulnerabilities identified and proposing appropriate remedial action;(c) reflected in the processes, strategies and systems established in accordance with BIPRU 12.3.4R;(d) used to develop effective contingency funding plans;(e) integrated into that firm's business planning process and day-to-day risk management;

A firm must adjust its strategies, internal policies and limits on liquidity risk and develop an effective contingency funding plan, taking into account the outcome of the alternative scenarios referred to in BIPRU 12.4.-1 R.2[Note: article 86(10) of the CRD]42

A4firm must have in place liquidity recovery4plans setting out adequate strategies and proper implementation measures in order to address possible liquidity shortfalls, including in relation to branches established in another EEA State.4 Those plans must be tested at least annually,4 updated on the basis of the outcome of the alternative scenarios set out in BIPRU 12.4.-1 R, and be reported to and approved by the firm'sgoverning body, so that internal policies and processes can

A contingency funding plan sets out a firm's strategies for addressing liquidity shortfalls in emergency situations. Its aim should be to ensure that, in each of the stresses required by BIPRU 12.4.1R, it would still have sufficient liquidity resources to ensure that it can meet its liabilities as they fall due.

A firm should ensure that its contingency funding plan takes into account the terms and conditions of any central bank liquidity facilities to which it has access, including both facilities that form part of normal liquidity management operations and emergency liquidity assistance on a secured basis. Where a firm includes in its contingency funding plan the use of central bank liquidity facilities it should consider the nature of those facilities, collateral eligibility, haircuts

(1) A firm must at all times maintain liquidity resources which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due.(2) For the purpose of (1):(a) a firm may not include liquidity resources that can be made available by other members of its group;(b) an incoming EEA firm or a third country BIPRU firm may not, in relation to its UK branch, include liquidity resources other than those which

The conditions to which BIPRU 12.2.1R (2)(b) refers are that the firm's liquidity resources are:(1) under the day-to-day control of the UK branch's senior management;(2) held in an account with one or more custodians in the sole name of the UK branch;(3) unencumbered; and(4) for the purpose of the overall liquidity adequacy rule only, attributed to the balance sheet of the UK branch.

For the purposes of the overall liquidity adequacy rule, liquidity resources are not confined to the amount or value of a firm's marketable, or otherwise realisable, assets. Rather, in assessing the adequacy of those resources, a firm should have regard to the overall character of the resources available to it which enable it to meet its liabilities as they fall due. Therefore, for the purposes of that rule, a firm should ensure that:(1) it holds sufficient assets which are

The overall liquidity adequacy rule is expressed to apply to each firm on a solo basis. Each firm must be able to satisfy that rule relying solely on its own liquidity resources. Where the firm is an incoming EEA firm or a third country BIPRU firm, compliance with the overall liquidity adequacy rule with respect to the UK branch must be achieved relying solely on liquidity resources that satisfy the conditions in BIPRU 12.2.3R.

For the purposes of the overall liquidity adequacy rule, an ILAS BIPRU firm must also ensure that:(1) its liquidity resources contain an adequate buffer of high quality, unencumbered assets; and(2) it maintains a prudent funding profile.

BIPRU 12.5 sets out the ILAS framework. That section describes some of the stress tests that a standard ILAS BIPRU firm must carry out in conducting its ILAA and identifies a number of sources of liquidity risk in relation to which a firm is required to assess the impact of those stresses. For a standard ILAS BIPRU firm, the requirements in BIPRU 12.5 are in addition to the stress testing requirements in BIPRU 12.4. The rules in BIPRU 12.5 require a standard ILAS BIPRU firm

As part of its SLRP, the appropriate regulator will, having regard to the liquidity risk profile of the firm, consider:(1) the adequacy, both as to amount and quality, of the liquidity resources (including the liquid assets buffer) held by the firm; and(2) the degree of prudence reflected in the firm's funding profile.

In assessing the adequacy of those resources, the appropriate regulator will consider a firm's overall ability to generate funding in a way that ensures that it can meet its liabilities as they fall due both in stressed and in ordinary business conditions.

After completing a review of the ILAA as part of the SLRP, the appropriate regulator will give a standard ILAS BIPRU firmindividual liquidity guidance, advising it of the amount and quality of liquidity resources which the appropriate regulator considers are appropriate having regard to the liquidity risk profile of the firm. In giving individual liquidity guidance, the appropriate regulator will also advise the firm of what it considers to be a prudent funding profile for the

A firm must have in place robust strategies, policies, processes and systems that enable it to identify, measure, manage and monitor liquidity risk over the appropriate set of time horizons for its business activities, to ensure that it maintains adequate levels of liquidity resources. These strategies, policies, processes, and systems must be appropriate to the firm's business lines, currencies in which it operates, and its group companies and must include adequate allocation

A firm must have in place reliable management information systems to provide its governing body, senior managers and other appropriate personnel with timely and forward-looking information on the liquidity position of the firm.

A firm must consider alternative scenarios in which its liquidity position could be impacted. The consideration of alternative scenarios must include and deal with off-balance sheet items and other contingent liabilities, including those of securitisation special purpose entities (SSPEs) or other special purpose entities, in relation to which the firm acts as sponsor or provides material liquidity support. These scenarios must be incorporated into the stress testing under MIPRU

In order to ensure compliance with MIPRU 4.2D.2 R, a firm must:(1) conduct on a regular basis appropriate stress tests so as to:(a) identify sources of potential liquidity strain; and(b) ensure that the risks of current liquidity exposures can be adequately managed; and(2) analyse the separate and combined impact of possible future liquidity stresses on its:(a) cash flows;(b) liquidity position; and(c) solvency; and(3) make, as soon as is practicable after a test has been performed,

A contingency funding plan sets out a firm's strategies for managing liquidity shortfalls in emergency situations. Its aim should be to ensure that, in each of the stresses set out in MIPRU 4.2D.11 G, it would have sufficient liquidity resources to ensure that it can meet its liabilities as they fall due.

A data series is unreliable if it has, for example, missing data points, or data points which contain stale data. Reliable data series may be difficult to obtain for new products (for example an instrument of longer dated tenor that did not previously trade) and for less liquid risk factors or positions. With regard to less liquid risk factors or positions, a firm may use a combination of prudent valuation techniques and alternative VaR estimation techniques to ensure there is

3The firm's approach must be based on the assumption of a constant level of risk over the one-year capital horizon, implying that given individual trading bookpositions or sets of positions that have experienced default or migration over their liquidity horizon are re-balanced at the end of their liquidity horizon to attain the initial level of risk. Alternatively, a firm may choose consistently to use a one-year constant position assumption.

(1) 3The firm's liquidity horizons for calculating incremental risk charge must be set according to the time required to sell the position or to hedge all material and relevant price risks in a stressed market, having particular regard to the size of the position.(2) Liquidity horizons must reflect actual practice and experience during periods of both systematic and idiosyncratic stresses. The liquidity horizon must be measured under conservative assumptions and must be sufficiently

3The determination of the appropriate liquidity horizon for a position or set of positions is subject to a floor of three months. The determination of the appropriate liquidity horizon for a position or set of positions must take into account a firm's internal policies relating to valuation adjustments and the management of stale positions.

3When a firm determines liquidity horizons for sets of positions rather than for individual positions, the criteria for defining sets of positions must be defined in a way that meaningfully reflects differences in liquidity. The liquidity horizons must be greater for positions that are concentrated, reflecting the longer period needed to liquidate those positions.

3For trading bookpositions that are hedged via dynamic hedging strategies, a rebalancing of the hedge within the liquidity horizon of the hedged position may be recognised only if the firm:(1) chooses to model rebalancing of the hedge consistently over the relevant set of trading bookpositions;(2) demonstrates that the inclusion of rebalancing results in a better risk measurement;(3) demonstrates that the markets for the instruments serving as hedges are liquid enough to allow

A firm with a complex portfolio is expected to demonstrate greater sophistication in its modelling and risk management than a firm with a simple portfolio. For example, a firm will be expected to consider, where necessary, varying degrees of liquidity for different risk factors, the complexity of risk modelling across time zones, product categories and risk factors. Some trade-off is permissible between the sophistication and accuracy of the model and the conservatism of underlying

The appropriate regulator recognises that it may not always be appropriate to apply BIPRU 12.5 (Individual Liquidity Adequacy Standards) to every ILAS BIPRU firm. For a firm which operates a relatively simple business model, it may instead be appropriate to allow the firm to calculate the size and content of its liquid assets buffer according to a simplified approach prescribed in the Handbook in advance of any review of that firm'sliquidity risk conducted by the appropriate regulator.

The appropriate regulator is likely to regard a simplified ILAS BIPRU firm whose liquid assets buffer accords with the simplified buffer requirement as having an adequate buffer of assets and a prudent funding profile for the purpose of BIPRU 12.2.8R. However, the simplified ILAS approach does not relieve a simplified ILAS BIPRU firm from the obligation to hold liquidity resources which are adequate for the purpose of meeting the overall liquidity adequacy rule or from the obligation

2For the purpose of BIPRU 12.6.6 R, a firm must calculate:(1) its total assets by reference to its most recent FSA001 data item; and (2) its retail loans as the total of its lending to the retail sector recorded in cell 11A in its most recent FSA015 data item.

(1) Subject to (3), a simplified ILAS BIPRU firm that has assets or liabilities denominated in either or both euros and United States dollars must carry out separate calculations under BIPRU 12.6.9Rin relation to its positions in each of those currencies, in addition to that which it carries out in relation to its sterling positions (if any).(2) A firm to which (1) applies must ensure that, for the purpose of meeting the simplified buffer requirement, it holds in its liquid assets

(1) A simplified ILAS BIPRU firm must regularly carry out an ILSA which contains an assessment of the firm's compliance with the standards set out in BIPRU 12.3 and BIPRU 12.4, including the results of the stress tests required by the rules in BIPRU 12.4.(2) The firm must make a written record of its ILSA.(3) The ILSA must be proportionate to the nature, scale and complexity of that firm's activities.(4) The ILSA must take into account group-wide liquidity resources only to the

Some further areas to consider in developing the liquidity risk scenario might include:(1) any mismatching between expected asset and liability cash flows;(2) the inability to sell assets quickly;(3) the extent to which a firm's assets have been pledged; and(4) the possible need to reduce large asset positions at different levels of market liquidity and the related potential costs and timing constraints.

Where a securities firm deals in illiquid securities (for example, unlisted securities or securities listed on illiquid markets), or holds illiquid assets, potentially large losses can arise from trades that have failed to settle or because of large unrealised market losses. A securities firm may therefore consider the impact of liquidity risk on its exposure to:(1) credit risk; and(2) market risk.

(1) A securities firm should also consider the impact of external factors on the levels of capital it needs to hold. Scenarios covering such external factors should relate to its strategy and business plan. A securities firm might wish to consider the questions in (2) to (7).(2) Whether it plans to participate in a one-off transaction that might strain temporarily or permanently its capital.(3) Whether the unevenness of its revenue suggests that it should hold a capital buffer.

A firm should also, when assessing liquidity risk, consider the amount of assets it holds in highly liquid, marketable forms that are available should unexpected cash flows lead to a liquidity problem. The price concession of liquidating assets is of prime concern when assessing such liquidity risk and should, therefore, be built into a firm'sICAAP.

Some further areas to consider in developing the liquidity risk scenario might include: (1) any mismatching between expected asset and liability cash flows;(2) the inability to sell assets quickly; (3) the extent to which a firm's assets have been pledged; and (4) the possible need to reduce large asset positions at different levels of market liquidity and the related potential costs and timing constraints.

Where a securities firm deals in illiquid securities (eg, unlisted securities or securities listed on illiquid markets) or holds illiquid assets, potentially large losses can arise from trades that have failed to settle or because of large unrealised market losses. Therefore, a securities firm may consider the impact of liquidity risk on its exposure to: (1) credit risk; and(2) market risk.

A securities firm should also consider the impact of external factors on the levels of capital it needs to hold. Scenarios covering such external factors should relate to its strategy and business plan. A securities firm might wish to consider the following factors:(1) whether it plans to participate in a one-off transaction that might strain temporarily or permanently its capital;(2) whether the unevenness of its revenue suggests that it should hold a capital buffer. Such an

BIPRU 12.2 provides that an ILAS BIPRU firm must ensure that its liquidity resources contain an adequate buffer of high quality, unencumbered assets. BIPRU 12.7 describes in more detail the nature of the assets that are eligible for inclusion in that buffer. The rules in this section provide that some types of assets are eligible for use only by a simplified ILAS BIPRU firm.

In deciding on the precise composition of its liquid assets buffer, a firm should ensure that it tailors the contents of the buffer to the needs of its business and the liquidity risk that it faces. In particular, a firm should ensure that it holds assets in its buffer which can be realised with the speed necessary to meet its liabilities as they fall due. In doing so, a firm should have regard to the currencies in which its liabilities are denominated and should take into account

SYSC 13 provides guidance on how to interpret SYSC 3.1.1 R and SYSC 3.2.6 R, which deal with the establishment and maintenance of systems and controls, in relation to the management of operational risk. Operational risk has been described by the Basel Committee on Banking Supervision as "the risk of loss, resulting from inadequate or failed internal processes, people and systems, or from external events". This chapter covers systems and controls for managing risks concerning any

For purposes of repurchase transactions and securities lending or borrowing transactions, the FCA does not consider that there are any core market participants apart from those entities listed in article 227(3) of the EU CRR.

(1) An authorised fund manager of a UCITS scheme or a UK UCITS management company of an EEA UCITS scheme must establish, implement and maintain an adequate and documented risk management policy for identifying the risks to which that scheme is or might be exposed.(2) The risk management policy must comprise such procedures as are necessary to enable the authorised fund manager or UK UCITS management company to assess the exposure of each UCITS it manages to market risk, liquidity

(1) An authorised fund manager or a UKUCITS management company of an EEA UCITS scheme must employ an appropriate liquidity risk management process in order to ensure that each UCITS it manages is able to comply at any time with COLL 6.2.16 R (Sale and redemption) or the equivalent UCITS Home State measures implementing article 84(1) of the UCITS Directive.(2) Where appropriate, the authorised fund manager or UKUCITS management company must conduct stress tests to enable it to

If a short position to which BIPRU 7.4 applies falls due before a long position to which BIPRU 7.4 applies, a firm must also guard against the risk of a shortage of liquidity which may exist in some markets.

In particular, where BIPRU 7.4.38R applies and the short position constitutes a material position compared to a firm's total commoditypositions, it should consider a further commodity PRR charge in respect of that position depending on the likelihood of a shortage of liquidity in that market.

A firm must at all times maintain overall financial resources, including capital resources and liquidity resources, which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due.

Risks may be addressed through holding capital to absorb losses that unexpectedly materialise. The ability to pay liabilities as they fall due also requires liquidity. Therefore, in assessing the adequacy of a firm's financial resources, both capital and liquidity needs should be considered. A firm should also consider the quality of its financial resources such as the loss-absorbency of different types of capital and the time required to liquidate different types of asset.15

An authorised fund manager carrying out due diligence for the purpose of the rules in this section should make enquiries or otherwise obtain information needed to enable him properly to consider:(1) whether the experience, expertise, qualifications and professional standing of the second scheme's investment manager is adequate for the type and complexity of the second scheme;(2) the adequacy of the regulatory, legal and accounting regimes applicable to the second scheme and its

Data may be deemed insufficient if, for example, it contains missing data points, or data points which contain stale data. With regard to less liquid risk factors or positions, the FCA expects the firm to make a conservative assessment of those risks, using a combination of prudent valuation techniques and alternative VaR estimation techniques to ensure there is a sufficient cushion against risk over the close-out period, which takes account of the illiquidity of the risk factor